Corporate Social Responsibility

Introduction 

Section 135 of the Companies Act, 2013 establishes a mandatory framework for Corporate Social Responsibility, requiring qualifying companies to channel a portion of their profits towards socially beneficial activities specified under Schedule VII. 

• The provision applies to every company having a net worth of rupees five hundred crore or more, or a turnover of rupees one thousand crore or more, or a net profit of rupees five crore or more during the immediately preceding financial year. 
• CSR under the Companies Act is not a voluntary initiative but a statutory obligation backed by penal consequences, making India one of the few jurisdictions in the world to legislate mandatory corporate social spending.

Constitution of the CSR Committee (Section 135(1) and (2)) 

• Every company meeting the prescribed threshold must constitute a Corporate Social Responsibility Committee of the Board, consisting of three or more directors, of whom at least one must be an independent director. 
• However, where a company is not required to appoint an independent director under Section 149(4), its CSR Committee may consist of two or more directors, without the requirement of an independent director. 
• The composition of the CSR Committee must be disclosed in the Board's report prepared under Section 134(3). 
• Where the CSR spending obligation does not exceed rupees fifty lakh in a financial year, the company is not required to constitute a CSR Committee, and the functions of such Committee shall in such cases be discharged directly by the Board of Directors.

Functions of the CSR Committee (Section 135(3)) 

The CSR Committee is entrusted with three core functions: 

• Formulation — It must formulate and recommend to the Board a CSR Policy indicating the activities to be undertaken in areas or subjects specified in Schedule VII. 
• Recommendation of Expenditure — It must recommend the amount of expenditure to be incurred on such activities. 
• Monitoring — It must monitor the CSR Policy of the company from time to time.

Role of the Board (Section 135(4) and (5)) 

• The Board of every qualifying company must, after taking into account the recommendations of the CSR Committee, approve the CSR Policy and disclose its contents in the Board's report. The policy must also be placed on the company's website in the prescribed manner. 
• The Board must further ensure that in every financial year, the company spends at least two per cent of the average net profits made during the three immediately preceding financial years in pursuance of its CSR Policy. Where a company has not completed three financial years since incorporation, the average shall be computed for such immediately preceding financial years as are available. 
• The company must give preference to local areas and areas around its place of operation while earmarking CSR expenditure. 
• For the purposes of this section, "net profit" shall not include such sums as may be prescribed, and shall be calculated in accordance with Section 198 of the Act.

Unspent CSR Amount and Carry-Forward (Sections 135(5) and (6)) 

Where a company fails to spend the requisite amount in a financial year, the Board must specify the reasons for non-spending in its report under Section 134(3)(o). 

• If the unspent amount does not relate to an ongoing project, it must be transferred to a Fund specified in Schedule VII within six months of the expiry of the financial year. 
• If the unspent amount relates to an ongoing project, the company must transfer such amount within thirty days from the end of the financial year to a special account called the Unspent Corporate Social Responsibility Account, opened in any scheduled bank. This amount must be spent within three financial years from the date of transfer; failing which, it must be transferred to a Schedule VII Fund within thirty days from the completion of the third financial year. 

Where a company spends an amount in excess of the prescribed requirement, such excess may be set off against the CSR spending obligation for succeeding financial years, in the manner prescribed.

Penalty for Non-Compliance (Section 135(7)) 

If a company defaults in complying with the obligations under sub-section (5) or (6): 

• The company shall be liable to a penalty of twice the amount required to be transferred to the Schedule VII Fund or the Unspent CSR Account, as the case may be, or rupees one crore, whichever is less. 
• Every officer in default shall be liable to a penalty of one-tenth of the amount required to be transferred, or rupees two lakh, whichever is less.

Conclusion 

Section 135 of the Companies Act, 2013 transforms CSR from a philanthropic discretion into a binding legal obligation, reinforced by a structured committee mechanism, mandatory disclosure norms, and a tiered penalty regime. The provisions governing unspent amounts and ongoing projects ensure that corporate social spending is purposeful, accountable, and directed towards the welfare activities enumerated under Schedule VII.